YOU DECIDE: Is the economy getting better?

May 15, 2009

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North Carolina's unemployment rate has doubled over the past year, and 250,000 jobs in our state have been lost. Pay in the private sector is being cut, and state employees are taking mandatory furloughs.

The economic times certainly don't seem good, yet some people are expressing optimism. In particular, investors in the stock market seem upbeat. From early March to early May, one index of the stock market has jumped 34 percent. Both the president and the chairman of the Federal Reserve have also expressed some positive views on the economy in recent speeches.

So what good economic news is there?

Let's begin with the job market. Although workers are still losing jobs, it appears the speed at which these losses are occurring is slowing. Nationally, first-time claims for unemployment insurance are now 5 percent under the peak set in early April, and in North Carolina new claims are down 12 percent from the high in February. Experience shows there's a 50 percent chance the economy will begin to improve within six months of the top in initial unemployment claims.

What about the housing market, which has been so important to this recession? Of course, the problem has been plunging sales, falling prices and foreclosures. The good news is that housing sales seem to have stabilized in both the nation and North Carolina, and nationally, housing prices are dropping but at a slower rate. Pending sales and foot traffic in homes for sale are also up. In North Carolina, one measure shows housing prices still rising modestly, and - importantly - home foreclosures in our state are down significantly in the first three months of 2009 compared to the same period in 2008.

One major way this recession has been different from previous ones is the damage done to the banking sector. Huge amounts of public money have been provided to stabilize the banks, but at the same time banks have tightened standards and curtailed loans.

The current conclusion is that the banking sector is no longer at the brink. Profitability has returned, and bank stocks are up. Indicators of stress - such as the LIBOR spread - are well down from their highs last fall. Interest rates are very affordable, and bank lending is up - albeit modestly - from the lows posted in 2008.

The stage may also be setting for a rebound in manufacturing. Of course, manufacturing always gets hit hard during a recession, simply because consumers and businesses can postpone buying manufactured products. Each of us keeps our aging car or computer a little longer. While this frugality helps consumers' budgets, it hurts the factory operator and worker.

However, there are some reasons for cautious optimism about manufacturing. Factories are rapidly cutting their inventories; in other words, factories have less finished product in stock. This is important because as long as inventories are plentiful, companies can sell from inventory and don't have to keep factories open to make more product. When inventories reach a sufficiently low level, production will be restarted. Another piece of good news is that orders placed for manufactured products increased in April.

Then there are the fancy indices of future economic activity, which combine many pieces of business information into one number, that economists follow. Recently, these indices have been flat, meaning the deterioration in the economy will soon come to an end, or modestly higher, suggesting a rebound in the economy later this year.

What should you make of all these statistics and trends? Here's what I (and I should say, many other economists) think. The recession is not over, and it will not be over next month or the month after that. The economy will continue to slide, and job losses will increase. But the pace of the decline seems to be slowing.

Think of our current economic situation as the letter "U." Moving from top to bottom along the left part of the U represents the recession. However, notice that before the bottom of the U is reached - which represents the bottom of the recession - the rate, or pace, of the decline slows down. This is where the economy is today. We're still dropping but not as fast.

The conventional economic forecast today sees the economy beginning to recover from the recession - that is, moving up the right side of the U - sometime between the last three months of 2009 and the first three months of 2010. In fact, much attention is now being focused on how strong that upswing will be. Unfortunately, the consensus now seems to be it will be weak.

So the good news is that many economists can now see an end to the recession. The bad news is it's as much as a year off. Also, don't forget that the end of a recession doesn't mean everything goes back to the way it was before the recession began. It simply means we've stopped falling. You decide if this is reason to cheer.

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University's College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The Department of Communication Services provides his You Decide column every two weeks. Earlier You Decide columns are at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm